Morgan Stanley has agreed to pay $1.25 billion to settle a lawsuit over the sale of mortgage-backed securities.
The money will be paid to the US regulator that oversees Fannie Mae and Freddie Mac mortgage guarantee firms.
US taxpayers had to rescue the two firms in 2008 in a bailout worth $187 billion during the financial crisis.
Morgan Stanley joins other banks, including JP Morgan Chase and Deutsche Bank, in settling with the Federal Housing Finance Agency (FHFA).
The banking giant will add an additional $150m to its legal reserves as a result of the settlement with the US regulator.
The US government filed lawsuits against 17 financial institutions in 2011 over the sale of residential mortgage-backed securities.
The mortgage securities became toxic when the US housing market collapsed.
Morgan Stanley has agreed to pay $1.25 billion to settle a lawsuit over the sale of mortgage-backed securities
In December 2013, Germany’s biggest lender, Deutsche Bank, agreed to pay $1.9 billion to settle a lawsuit with FHFA.
The German bank had been accused of breaking state and federal laws when it sold financial products backed by mortgage loans to Fannie Mae and Freddie Mac between 2005 and 2007.
One month prior, in November 2013, US bank JP Morgan Chase agreed to a $13 billion settlement with the FHFA for misleading investors during the housing crisis.
It was the largest settlement ever between the US government and a corporation.
At the time, JP Morgan Chase acknowledged it had made serious misrepresentations to the public, but said it did not violate US laws.
Morgan Stanley’s quarterly net income for the October-to-December period last year was more than halved by heavy legal fees relating to the mortgage-backed securities.
The lender’s fourth quarter earnings, which were reported earlier this month, were $433m, down from $982 million a year earlier.
Legal expenses were $1.2 billion.
Citigroup and JP Morgan were also affected by legal costs stemming from the sub-prime mortgage crisis.
Morgan Stanley said its legal costs were “specifically litigation and investigations related to residential mortgage-backed securities and the credit crisis”.
JP Morgan has agreed to pay $4.5 billion to investors who lost money on mortgage-related securities during the financial crisis.
The settlement is with 21 major institutional investors.
Mortgage-related investments were a major factor in the crisis, which began in 2007 with the collapse of the US housing market.
Last month JP Morgan agreed a separate, preliminary $13 billion deal with the US government over mortgage securities.
As part of that deal $5.1 billion would go to settle charges that the bank misled mortgage giants Fannie Mae and Freddie Mac during the housing boom. That settlement was the biggest ever by a US bank.
JP Morgan has agreed to pay $4.5 billion to investors who lost money on mortgage-related securities during the financial crisis
Now, 21 institutional investors that put money into more than 300 residential mortgage-backed securities are to be reimbursed by the bank.
The securities in question were issued between 2005 and 2008 by JP Morgan and Bear Stearns – a bank which it took over during the financial crisis.
“This settlement is another important step in JP Morgan’s efforts to resolve legacy related… matters” stemming from mortgage-related securities, JP Morgan spokeswoman Jennifer Zuccarelli said in a statement on Friday.
Friday’s deal still has to be accepted by trustees for the trusts that hold the securities.
A final settlement with the US Justice Department is expected to be announced soon.
Mortgage-backed securities were sophisticated financial products created by many investment banks in the run-up to the financial crisis.
These special bonds contained a mix of investments but at their heart were supposed to be risk-free home loans.
When the housing bubble burst, the value of these assets fell sharply and the credit markets seized up. The balance sheets of many US and European banks, including those in the UK, became toxic and they had to be bailed out by their governments.
What JP Morgan is alleged to have done was sell the mortgage-backed assets knowing full well that many of the home loans were in fact very risky.
The US government is seeking $864 million in compensation from Bank of America for losses over home loans sold to it by the bank’s Countrywide Financial unit.
US attorney Preet Bharara made the request in documents filed late Friday in New York.
Bank of America was found liable for defrauding two US state-backed mortgage companies by a federal jury last month.
Countrywide Financial was acquired by Bank of America in 2008.
The ruling was a major win for the US government, which launched the case in the wake of the financial crisis.
Reports last month suggested that US banking giant JP Morgan is set for a record $13 billion fine to settle investigations into its mortgage-backed securities.
The US government is seeking $864 million in compensation from Bank of America for losses over home loans sold to it by the bank’s Countrywide Financial unit
Wells Fargo agreed to pay $335 million to settle claims it misled investors over mortgage-backed bonds.
The US Department of Justice is investigating at least nine banks over their sales of mortgage-backed securities.
Countrywide Financial was found liable for selling thousands of defective loans to Fannie Mae and Freddie Mac.
The month-long trial focused on a Countrywide programme that was internally called “Hustle” or “high-speed swim lane” which allowed loans to be processed quickly without checking their quality.
The wrongdoing, which mostly took place before Countrywide was acquired, was discovered after a whistleblower filed a lawsuit against the firm.
The US economy witnessed a big boom in its housing market in the lead-up to the 2007-08 global financial crisis.
As house prices continued to rise, many banks looked to cash in on the boom by creating complex financial products that grouped together home loans.
However, a collapse in the housing market saw the value of those investments plummet as the underlying mortgage holders became unable to repay their debts.
This snowballed into the subprime crisis, which hurt investors globally and caused billions of dollars in losses.
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